What is Crowdfunding

Crowdfunding is literally what the word says it's a crowd who's funding, whereby we are removing again remember the whole idea and notion of Finance is to remove the traditional intermediaries yes or concept the traditional intermediary being a conventional Bank the idea of alternative Finance is financing in an alternative way which is the removal of the traditional body or intermediary and so when we talk about crowdfunding happening literally means a crowd of people a group of people investors funding an Enterprise funding a project, whatever venture whatever it may be it's when a number of people come and they can access they can see online on a platform you can see a range of options they can opt to invest their funds in a range of products or projects and you know whatever they risk and return profile is you know people can choose accordingly.

Different Models of Crowdfunding

Crowdfunding comes in many sizes and forms that's a reality this is not one style of crowdfunding there's different models that are out there when it comes to crowdfunding for example one of the easiest and it's a very common form of crowdfunding which is generally used in you could say charitable projects so I know some Sharia compliant ones where Muslims are crowdfunding for you know uh charitable causes welfare projects for poor people or a number of people come together and support one cause that's a form of crowdfunding where so many people have come together you have not gone through a charity or anything traditionally they've gone directly with the person, he launches a campaign people see that campaign they feel like it's a worthy cause to donate to and so they donate so the crowd online has all funded this one person that's one style which is a donation based crowdfunding mechanism it's donation based is very common in a charitable space of course for the donors for those who are funding they receive nothing it's purely altruistic in nature it's purely more reward seeking more you know self-fulfillment it's not so much about getting Equity or gaining a profit is very rare then you have a second model which is not so common but it does exist is what we call a pre-purchase model.

The pre-purchase model of crowdfunding

The pre-purchase model is very interesting because it allows people to set the product that they have before it's even created it's similar in Islamic Finance we have a concept called is this not in a concept called Salem so these two are about the idea of entering into a contract before the item is even there or been created and it's similar in that sense in terms of its concept and philosophy whereby this pre-purchase crowdfunding model it allows people to access early Finance which then can be used to develop a product and therefore they take orders for this end of course that would mean if you have put some money and you invested this you will have entitlement to a product when it's made so that's the second form of crowdfunding two number three we could say is more about like a rewards based crowdfunding which is also you know similar the donation model.

But what happens here is the crowd the the platform or the one who is being funded gives rewards to those who have funded them so it's you do get a return here but the return is not so much of profits or you know Equity it's more about you know you receiving something a service or a product as a way of saying thank you to you so you say rewards based crowdfunding so people have then are incentivized because sometimes the rewards are really good so people think you know what it's a really good report it's worth ten thousand pounds let me just try yes it does create it's put possible that it creates kind of gambling psychee but it's not purely gambling in a sense that this is the item is promised to somebody or or potentially to everybody depending who it is and secondly your money is not used to acquire the asset if it's used to acquire an asset only one person gains that means the number of people are staking their wealth to gain that asset that would fall in the gambling and that would be not permissible in Sharia so that's where the Sharia risk and share your concern is for this type of crowd funding.

Equity crowdfunding and Debt crowdfunding

The final two is equity crowdfunding and debt crowdfunding Equity crowdfunding can be for companies and it can also be in real estate both are on the market both are very common. What we mean by Equity crowdfunding is the investors will come onto the platform they actually get a share in the company they are investing in so they actually get an ownership stake in the company or it's real estate so the investors get a share in actual property and the property is leased and therefore in this scenario the investors receive a rental return whereas in equity crowdfunding when it's to do with investment and to SME’s and businesses the investors are rewarded with profit right that's the difference and then finally it's debt card funding debt card funding is what it says that it's whereby people on this crowdfunding platform will provide financing through debt and of course annual return on that is interest in will not be sharing a complaint.

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